• Maintain BUY and SGD1.71 TP, 38% upside with c.3% FY25F yield. We remain upbeat on Frencken Group, as its 3Q24 results are in line with expectations. FRKN is a beneficiary of the anticipated semiconductor sector’s recovery in 2025, driven by the latter’s 14% YoY revenue growth this year, according to consulting firm Gartner. Also, SEMI expects the 300mm fabrication (fab) equipment market to expand by 24% YoY (USD132m) next year, driven by the demand for AI chips and regionalisation of fab plants. FRKN is trading at -0.5SD from its historical mean P/E.

• 3Q24 results are in line. 3Q24 revenue grew 8% YoY to SGD199m while PATMI expanded by 20% YoY to SGD9m. Revenue growth was driven by the mechatronics division, whose turnover rose by 11% YoY to SGD177m. This was offset by the 13% YoY decline in its integrated manufacturing services (IMS) division’s revenue to SGD21m. The mechatronics division’s semiconductor segment continued to perform well (+238% YoY, SGD92m) with steady sales to its key customer in Europe and a continued recovery in Asia. Meanwhile, revenue of its industrial automation and analytical & life science units grew by 4% and 32% YoY to SGD45m and SGD9m. Industrial automation enjoyed its key customer’s increase in capex expenditure, while the analytical & life science segment was lifted by higher sales to a key customer in Europe. The medical segment’s revenue dropped 4% YoY to SGD30m on slower customer orders in Europe. The IMS unit’s automotive segment saw a 12% YoY revenue decline to SGD16m. It’s consumer and industrial electronics segment’s revenue also declined by 9% YoY to SGD5m. GPM was 14% (+1.6ppts from 3Q23 and sequentially lower by 0.7ppts from 2Q24 due to sales mix). PATMI was at SGD9m, with a net margin of 5%.

• Outlook remains positive. FRKN still expects its 2H24 revenue to improve on a HoH basis, ie a trend that is unchanged from the previous quarter. The semiconductor unit is expected to post higher revenue, while the medical, analytical & life science, and automotive units should record stable turnover. The turnover of its industrial automation business continutes to recover, albeit somewhat unevenly in the various sub-segments. It continues to support its key customer in Europe, as well as customers that have moved production to Asia. In addition, FRKN is opening a larger facility in the US to support semiconductor customers in 1Q25. In the analytical & life sciences division, sales are supported by new product introductions (NPIS), and steady orders to a key customer in Europe. Both Gartner and SEMI have also forecasted firm growth in 2025 for revenue, and the 300mm fab equipment market in the semiconductor sector.

• Key downside risks to our forecasts and TP include a later-than-expected demand recovery. As FRKN’s 3.0 ESG score is below our 3.1 country median, we apply a 2% discount to its intrinsic value to derive our TP.

Source: RHB Securities Research - 21 Nov 2024